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Palladium ETF Surging on Tensions in Ukraine

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The geopolitical tension between Russia and Ukraine has grabbed the attention of the global investing market to start this year. The crisis has not been confined to war of words only; the possibility of war also cropped up in the Crimean peninsula. The Ukrainian clash is not only a net negative for the East-European territory, but it could have a ripple effect on the West as well.

The conflict really dated back to November 2013 when the presently ousted Ukraine president, Viktor Yanukovich abstained from signing an Association Agreement with the European Union for closer ties with Russia. The move set off weeks of anti-government protests in the country overthrowing Yanukovich from his office.

However, Russia still declines to recognize the newly established interim government in Ukraine, and Russian forces took control of a Ukrainian border guard post in western Crimea. Russia’s move spread tension in the U.S. and Europe. Both parties have accused Russia of violating international law through an army intervention into Crimea.

Earlier, Crimea was the part of Russia and became part of Ukraine only in the 1950s. The region houses Russia's Black Sea fleet, and its chief port is on lease to Russia. Putin is concerned that the latest Ukrainian government will cancel the Russian Navy's lease, making matters worse.

The fate of the Black Sea peninsula, which will either move to Russia or stay with Ukraine, will be decided in a referendum to be held on March 16 by the local Crimean administration. The latest developments include the tightening of security in Crimea by pro-Russian militia.

Consequently, all these have dampened the global stock market outlook, though presumably for the near term. However, the mayhem is a blessing in disguise for some commodities like oil and gas as well as palladium which is found abundantly in Russia (read: 3 Energy ETFs to Buy on the Ukraine Crisis).

A Boost to Palladium Investing

Russia is the biggest producer of Palladium. Concerns of any economic approval against Russia or trade restrictions (if it continues to intervene in Ukraine) could upset the export of the metal that pushed up the price of the commodity palladium. The European Union earlier has hung up talks on visa liberalization and an economic agreement with Moscow to disapprove Russia's sortie into Ukraine's Crimean Peninsula.

Investors should note that the metal is already undergoing a supply crunch. Diminishing stockpiles in Russia and production outages are leading to the highest supply deficit since 2000. Stockpiles could finish by the end of 2014, as per some analysts (Read: Will Palladium ETF Shine Brightest This Year?).

The Russian geopolitical risk hit at a time when the palladium market has been bucking under pressure with reduced supplies from another major produce South Africa owing to a month-long strike in South Africa’s mining sector. Both these situations have enabled palladium's price to hit the 11-month high in early March.

Also, the demand for palladium has been steadily rising in the global auto industry which is also expanding at a fast clip. The metal is largely used in the production of catalytic converters in automobiles manufactured in China and the U.S., the world’s two biggest auto markets (read: Robust Car Sales Bring Auto ETF in Focus).

Amid hopes for higher prices for the metal, this could be the right time to invest in the metal. Below we have highlighted the only pure-play on the metal – ETF Securities Physical Palladium Shares (PALL) – in detail.

Inside PALL

For a bullion-backed approach to palladium ETF investing, investors can look to ETF Securities Physical Palladium Shares or PALL. The ETF holds the metal in the form of bullion, or ingots. The metal is safely stored in London and Zürich on behalf of the custodian, JP Morgan Chase Bank.

Investing through PALL in palladium represents a cost-effective and suitable mode for investors. The transaction costs for buying and selling the shares will be much lower than purchasing, storing and insuring physical palladium for most investors (read: 3 Commodity ETFs Still Looking Strong).

This ETF is designed to track the spot price of Palladium bullion and has amassed about $495.7 million. The expense ratio of 60 basis points appears reasonable in the precious metals ETF space.

PALL has returned about 7.84% year to date. The performance left behind the other precious metal products like iShares Silver Trust (SLV - ETF report) and ETFS Physical Platinum Shares (PPLT - ETF report) which added 7.11% and 6.59%, respectively, in the time frame. Only gold ETFs have outperformed the metal so far this year in the space.

From a technical standpoint as well, PALL looks attractive. The short-term moving averages of PALL are above the long-term averages as depicted in the chart above. This suggests continued bullishness for this ETF.

However, there is a little drag in the relative strength index that stands at 65.67 suggesting that the fund is approaching overbought territory. However, there is still time before the interest in palladium investing gets stale and investors can easily try out the latest surge in it.

We give the product a Zacks ETF Rank of 3 or ‘Hold’ rating, though with the current geopolitical concerns, this could be an interesting play for investors in the short-term.

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